The price of ethanol credits has skyrocketed 20-fold in just six
months, leaving many to believe that Wall Street has exploited the
market.

It was supposed to help clean the air, reduce America's
dependence on foreign oil and bolster agriculture. But a little-
known market in ethanol credits has also become a hot new game on
Wall Street.

The U.S. government created the market in special credits tied to
ethanol eight years ago when it required refiners to mix ethanol
into gasoline or buy credits from companies that do so. The idea was
to push refiners to use the cleaner, renewable fuel or force them to
buy the credits.

A few worried that Wall Street would set out to exploit the young
market, fears the government dismissed. But many people believe that
that is what happened this year when the price of the ethanol
credits skyrocketed twentyfold in just six months, according to an
analysis of regulatory documents and interviews with more than 40
people involved in the market, including industry executives,
brokers, traders and analysts.

Traders for big banks and other financial institutions, these
people say, amassed millions of the credits just as refiners were
looking to buy more of them to meet an expanding federal
requirement. Industry executives familiar with JPMorgan Chase's
activities, for example, said the bank had offered to sell them
hundreds of millions of the credits earlier this summer. When they
asked how the bank had amassed such a stake, the executives said
they had been told by the bank that it had stockpiled the credits.

A spokesman for JPMorgan disputed the account, saying the bank
does not trade ethanol credits for a profit in the way it trades
other securities, but is registered to deal in credits through its
energy business. The spokesman, Brian J. Marchiony, said in a
statement that from time to time the bank also purchased credits "on
behalf of clients who need to fulfill their EPA-mandated
obligations," though it had not done so in the past year. "EPA"
refers to the U.S. Environmental Protection Agency.

But other market participants, including Thomas D. O'Malley,
chairman of PBF Energy in Parsippany, New Jersey, identified
JPMorgan Chase and other financial institutions as being active
sellers of the credits this year. He said the institutions had
helped transform an environmental program into a profit machine,
contributing to the market frenzy this year. "These things were
designed to monitor the inclusion of ethanol in the gasoline pool,"
Mr. O'Malley said. "They weren't designed to become a speculative
item. For the life of me, I can't see the justification for it."

While banks are by no means the largest players in ethanol
credits, Wall Street's activity in the market reflects a larger
effort by financial institutions to exert their influence over
loosely regulated markets for basic commodities, like aluminum and
oil. The opacity of the ethanol credit market makes it difficult to
determine the extent to which large financial actors have profited.

The banks say they have far less influence in the market than
others are suggesting and are doing nothing wrong. But the
activities, while legal, could have consequences for consumers. In
the end, energy analysts say, the outcome will be felt at the gas
pump -- as the higher cost of the ethanol credits gets tacked onto
the price of a gallon of gasoline. (The credits, which cost 7 cents
each in January, peaked at $1.43 in July, and now are trading for 60
cents.)

Valero Energy, a refiner that owns thousands of gasoline
stations, said the squeeze in ethanol credits might cost it $800
million. PBF Energy, also a refiner, puts its bill at $200 million.
A review of a federal registry of nearly 1,500 businesses and
individuals in the renewable fuel market found big Wall Street banks
as well as a handful of people with troubled legal histories.

Scott Mixon, the acting chief economist of the Commodity Futures
Trading Commission, said in an interview Friday that the issue of
banks' involvement in the market was something the agency was
tracking and might look into more deeply because of the ethanol
component. …

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